By Margaret Franklin, CFA, President and CEO, CFA Institute
Many of us remember the harsh challenges brought on by the great recession. But today, unlike the financial crisis, the challenges we face result from one omnipresent factor, COVID-19. Though not the “fault” of our profession, our industry still faces immense pressure during these times of market volatility as the stewards of our clients’ investments. Trust in our institutions is surely being put to the test now. And we think trust will be a key element in rebuilding the global economy.
Despite the significant role we play in the economy and in helping our clients’ achieve financial security, a trust gap exists in our industry. Simply put, a delta – literal and figurative – stands between what clients expect and what investment advisers actually deliver.
CFA Institute recently published the fourth edition of our global Investor Trust Study, which shows that the proportion of retail investors who say that their adviser ranks as their most trusted source of advice lags. This trust gap should be deeply concerning to the investment advisory industry. Given that close to 80% of CFA charterholders predict a slow to stagnant global recovery in the short term, before eventually picking up in the medium term, advisers should be at the forefront, guiding their clients through this volatility. If we are to rebuild clients’ financial security through what our members see as a “hockey stick-shaped” recovery, we need to mitigate the trust gap between investors and advisers.
The foundation of sound investment decision-making is built on trust; it remains the bedrock on which financial relationships and transactions occur. Yet the essential, enduring feature of trust that may be overlooked is that two sides of the relationship exist: the client’s willingness to trust and the adviser’s (and, by proxy, his/her firm’s) worthiness of trust.
The fundamental question that we need to be asking ourselves at this time is: what does it take for someone to put their savings at risk and trust someone else to manage their wealth?
One clue: our Trust Study found that credibility combined with professionalism equates to increased trust and value. Advisers should therefore pursue ongoing professional learning and also obtain relevant credentials to deepen the bonds of trust.
Our Trust Study also noted that information remains essential for building trust. Fees and costs represent one of the most important areas of transparency and information for investors. Eighty-three percent of retail investors and 75 percent of institutional investors agree that one of the key factors in creating a trusted relationship is full disclosure of fees and other costs. The less an investor feels informed, the less they trust the financial system.
Further, while technology has been seen as a looming dark cloud by some in the investment management industry – viewing financial technology and artificial intelligence as threats to job security – our Trust Study showed that advisers should embrace these advancements. Innovation and technology scored as trust enhancers. Consider the opposite: would an investor be likely to trust a firm with outdated technology?
Investment advice is still preferred to come from a human source; economic intuition and experience are what investors truly value in a financial adviser. Coupling human advice with the benefits of leading-edge technology leads to more trust.
We also found that an investor’s desire for influence is growing and provides opportunities for the investment industry to strengthen trust. One specific way to create influence for clients is to build customized products that integrate investor values. Seventy-six percent of institutional investors and 69 percent of retail investors report an interest in ESG investing. Two-thirds of institutional investors think the growth of ESG investing has increased trust in the financial services industry. Opportunities to align these interests should inform the product offerings of advisers.
All black swans are not born equal, and this pandemic caught many people off guard. Now more than ever, we need to be able to bring all our skills to bear in a way that helps investors feel more confident about the future – and their financial futures. And that starts with trust. Investment professionals who understand and navigate the layers of investor trust will be better equipped to serve their clients and demonstrate how the investment industry can better serve society.